Monetary Policy and GDP Calculations

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Questions and Answers

What happens to the supply of reserves when the Fed sells a government security?

It has no effect on the supply of reserves

It decreases the supply of reserves (correct)

It varies depending on the bank’s reserves

It increases the supply of reserves

What is the effect on the federal funds rate when the Fed conducts an open market operation by selling securities?

It lowers the federal funds rate

It stabilizes the federal funds rate

It raises the federal funds rate (correct)

It has no discernible effect

How does a bank's desired reserves relate to its total reserves following the open market operation?

Desired reserves are lower than total reserves

Total reserves are exactly equal to desired reserves (correct)

Desired reserves are higher than total reserves

They do not relate to one another

What is the largest asset category in the banking system balance sheet?

Government securities Signup and view all the answers

Which of the following is the largest liability in the banking system?

Deposits Signup and view all the answers

Who is the current Chair of the Board of Governors of the Federal Reserve?

Jerome Powell Signup and view all the answers

How many member commercial banks make up the base of the Federal Reserve's organizational structure?

3,000 Signup and view all the answers

What role does the Federal Open Market Committee (FOMC) serve within the Federal Reserve?

Setting the nation’s monetary policy Signup and view all the answers

Which asset is primarily held as reserves at the Federal Reserve?

Cash assets Signup and view all the answers

What is the purpose of the Federal Reserve's member banks?

To distribute currency and manage monetary policy Signup and view all the answers

What is a key characteristic of the Federal Reserve as an organization?

It is quasi-public/quasi-private Signup and view all the answers

What comprises the aggregate demand (AD) in the economy?

Consumption demand, Investment demand, and Government spending Signup and view all the answers

Which factor is NOT likely to cause a shift in the aggregate demand curve?

Change in consumer preferences Signup and view all the answers

Under what conditions does short-run aggregate supply (SRAS) typically shift to the right?

Increase in the capital stock Signup and view all the answers

What happens in the short run concerning wages when the price level rises?

Wages remain relatively unchanged Signup and view all the answers

What is indicated by an upward-sloping short-run aggregate supply curve?

Real GDP increases while unemployment decreases Signup and view all the answers

What primarily causes economic growth in the context of aggregate supply?

Increase in population or labor force participation Signup and view all the answers

In the long run, how do costs respond to changes in the price level?

They adjust fully to the price changes Signup and view all the answers

What is the impact of higher wage rates on the short-run aggregate supply curve?

It shifts to the left Signup and view all the answers

Which of the following correctly defines an employed worker?

Worked 15 or more hours on family farm or business Signup and view all the answers

What constitutes an unemployed worker according to the information given?

Without a job and looking for work in the previous four weeks Signup and view all the answers

What is the formula to calculate Real GDP using Nominal GDP and the GDP Price Deflator?

Nominal GDP / GDP Price Deflator Signup and view all the answers

What is the total labor force comprised of?

Employed plus unemployed workers Signup and view all the answers

What is the primary effect of a massive fall in income on aggregate demand?

It decreases aggregate demand. Signup and view all the answers

Which policy was implemented first among the three massive policies mentioned?

CARES Act. Signup and view all the answers

What is the goal of the policies instituted in March 2020?

Increase consumption and investment. Signup and view all the answers

Following government policies, what happens to aggregate supply?

It increases. Signup and view all the answers

What is the target inflation rate the Committee aims to achieve in the long run?

2 percent. Signup and view all the answers

What effect does a significant increase in government securities purchases typically have on interest rates?

Interest rates tend to fall. Signup and view all the answers

What impact do the policies have on inflation after they are implemented?

Inflation increases. Signup and view all the answers

What was the federal funds rate target range set to around the time of policy firming?

$3/4 to 1 percent. Signup and view all the answers

Study Notes

Monetary Policy Operations

The Federal Reserve (Fed) increases the federal funds rate by selling government securities to banks, reducing their reserves.
A bank may borrow necessary reserves to maintain liquidity after purchasing securities from the Fed.

Bank Reserves and Loans

Bank’s total reserves before borrowing: 100,withdesiredreservesalsoat100, with desired reserves also at 100,withdesiredreservesalsoat100, resulting in zero excess reserves.
After the Fed’s action, a bank’s balance sheet includes government securities worth 9,950againstliabilitiesof9,950 against liabilities of 9,950againstliabilitiesof1,950 in reserves.

Real GDP Calculation

Real GDP 2023 calculation: (6×100)+(6 × 100) + (6×100)+(5 × 80) = $1,000.
Real GDP 2024 calculation using base year prices: (6×120)+(6 × 120) + (6×120)+(5 × 60) = $1,020.
Real GDP growth rate from 2023 to 2024: 2%.

Nominal and Real GDP Relationship

Nominal GDP for 2024: $1,440 with a corresponding GDP price deflator of 1.42.
The GDP price deflator converts nominal GDP to real GDP and is presented as an index number (1.42 × 100 = 142).

Employment Definitions

Employed workers are those who have worked for pay or are temporarily absent for legitimate reasons.
Unemployed workers do not have a job but have actively sought work in the preceding four weeks.
Labor force consists of both employed and unemployed individuals.

Aggregate Demand and Supply

Aggregate demand (AD) is the sum of consumption, investment, and government spending: AD = C + I + G.
Shifts in AD can result from changes in taxes, interest rates, or government purchases.
Aggregate supply (AS) varies in the short run versus the long run; short-run costs, like wages, do not immediately respond to price changes.

Economic Growth Indicators

Economic growth occurs when factors like labor force participation or technological advances shift the aggregate supply curve to the right.
Short-run aggregate supply adjusts to increased output without immediate changes in wage levels, while long-run adjustments fully align wages with price levels.

Federal Reserve Organizational Structure

The Fed operates as a quasi-public/quasi-private entity consisting of member commercial banks, 12 Federal Reserve Banks, and a Board of Governors with 7 members.
The Federal Open Market Committee (FOMC), responsible for monetary policy, includes the Board of Governors and selected district bank presidents.

Recent Federal Monetary Policies

Significant acts like the CARES Act and stimulus packages aimed to bolster consumption and investment during economic downturns.
Federal funds rate was slashed to near 0% and the Fed engaged in massive purchases of securities to stabilize the economy and encourage borrowing.

Inflation and Monetary Policy Goals

Inflation has risen due to transitory factors, with the Fed aiming for a 2% long-term inflation rate, adjusting monetary policy to support maximum employment.
Interest rate targets have been increased in response to economic conditions, reflecting the Fed's proactive stance on inflation and growth targets.

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Description

Explore the dynamics of monetary policy operations, including the impact of the Federal Reserve's actions on bank reserves and loans. Additionally, understand the calculation of Real GDP and its relationship with Nominal GDP using provided examples. Test your knowledge on key economic principles.